NFTs & Sales Tax
If you are an individual, artist or company that is selling NFTs as part of a trade or business activity you need to consider how sales taxes are applied to the sale of each NFT you sell. Do not avoid this and overlook a huge tax bill. It’s important to consider the tax consequences immediately to avoid overpaying in taxes. If you do not properly assess, collect, report and remit the sales taxes that you may be liable for selling NFTs you are creating audit and penalty risk for your company.
We’ll go over the current guidance and challenges related to NFTs and sales tax. This will help you not only avoid interest in penalties with the tax agencies but also help to avoid overpaying in taxes due to compliance oversights.
What Are Sales Taxes
Sales taxes are imposed at the state level and are based on consumption. This means when you buy an item from retailers, you are charged sales tax which is collected by the retailer and remitted to the state. The majority of states impose a sales tax that can range in tax rates from 2% to 10% depending on the state.
On July 1, 2022, Washington State issued an Interim Guidance Statement subjecting non-fungible tokens to a 6.5% sales tax and a 0.471% trade and occupancy tax. Washington is first state to provide guidance related to sales tax for NFTs.
Based on this guidance, NFT retailers, which includes individuals who sell NFTs as part of their business, are required to collect sales tax from the buyers of their NFTs and pay sales tax if the sale is attributed to Washington. Since NFTs can represent almost anything, Washington has indicated that they want to tax the NFTs based on the character of the underlying product associated with the sale.
Currently this guidance only applies to non-fungible tokens with no guidance provided for fungible cryptocurrencies such as Bitcoin or Ethereum.
According to the interim guidance provided by the state of Washington, an NFT may represent the following:
- a) digital products, such as music, visuals, video works, or video games,
- b) admission to non-retailing taxable events, such as tickets to clubs, sporting events, or concerts,
- c) prepared foods and beverages served by restaurants, or
- d) Tangible personal property, such as memorabilia, collectibles, or apparel.
Sales tax liabilities can be collected from customers in cryptocurrency but must be remitted to the state legally.
An NFT artist sells a digital NFT art piece to a customer located in the state of Washington for 5 ETH which is valued at $10,000 at the time of the sale. The total sales tax that the artist will have to collect and remit to the state is $650. This means the customer will have to pay a total of $10,650 for this NFT to pay for the costs of the sales tax which the NFT artist will collect, report and pay to the state.
There is currently no guidance related to how sales tax is applied to NFTs in other states. There are currently over 30 states that currently impose sales taxes on digital products such as music or e-books. NFT sellers may currently be liable for sales tax in these states based on this existing guidance but this is unclear and should be discussed directly with your tax advisor.
I expect to see other states create NFT sales tax guidance and regulations shortly given the action we see from Washington.
Pennsylvania and Puerto Rico are also working to clarify how sales tax applies to NFTs. In February 2022, the Treasury Department of Puerto Rico proposed adding NFTs to the list of taxable digital products. A few months later, the Pennsylvania Department of Revenue updated Rev-717 to specify that non-fungible tokens are taxable. The Multistate Tax Commission and the Streamlined Sales Tax Governing Board are also working to determine how to best classify NFTs for sales tax purposes.
Compliance and Enforcement
We have seen Washington take steps in clarifying rules related to NFT and sales tax but actual enforcement and compliance will be challenging due to the decentralized nature of cryptocurrency and NFTs.
In order to correctly assess, collect, report and pay sales tax for NFT sales information related to the customers location including zip code will have to be collected when selling the NFT by the company or individual selling the NFT.
Companies that fail to collect and remit sales taxes which are due face significant compliance and audit risks realted to back taxes and penalties associated with past sales.
If you are an individual, artist or company that is selling NFTs are part of a business activity it is important to assess your current and future sales tax liabilities and create a compliance system for your business. Do not avoid this and overlook a huge tax bill. It’s important to consider the tax consequences immediately to avoid overpaying in taxes.
If you are an artist or company that sells NFTs Camuso CPA will help you develop a system to assess sales tax compliance, create an accounting system for your business and implement a tax plan for your NFT business. At Camuso CPA, we have established a well-tested process to deliver clients with NFT, crypto assets and digital businesses accurate cryptocurrency accounting and timely tax advice.
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